It is easy to amass credit card debt – the new suit that would be perfect for next week’s meeting; the new cell phone with the latest applications, the new flat screen television that would take up far less space. All of these purchases are easy to justify. With credit cards, the payments can be spread over many months, for a fee. What happens, though, when it becomes difficult to make even the minimum monthly payments on each credit card?
According to the Washington Post, Americans posses nearly 700 million bank cards, and another 500 million store-specific cards. The average balance on one household’s credit cards is over $15,000. That amount may not seem like a large debt to carry, compared with a mortgage of $300,000. However, one needs to remember that, unlike a mortgage, credit card debt in unsecured. Because it is unsecured, credit card companies charge higher interest rates than mortgage companies. Additionally, credit card companies may charge a number of fees for annual membership or late payments.
With an average credit card interest rate of 17%, a credit card owner carrying a debt of $100 would incur a monthly payment of $20 for approximately six months in order to pay off the debt. He would also incur approximately $5 in interest charges. When the figures are low, such as in this example, the convenience of credit cards seems to balance the cost. However, when using the average household credit card balance, the figures are staggering. With an average credit card interest rate of 17%, a credit card owner carrying a debt load of $15,000 would incur a monthly payment of $300 for approximately forty-six years in order to pay off the debt. He would also incur approximately $34,752 in interest charges. Suddenly, credit card debt does not seem so reasonable.
Compare these charges to the average mortgage interest rates. The average rate for a thirty-year fixed-rate mortgage is approximately 4.9%. Using the interest rate of $4.9%, a credit card owner carrying a debt of $15000 would incur a monthly payment of $300 for approximately nineteen years. He would also incur approximately $3,713 in interest charges. In other words, the difference between a secured loan and an unsecured loan can mean a difference of twenty-seven years of debt. In monetary terms, it is a difference of $31,039.
The First Step to Debt Elimination
The first step in pursuing a credit card debt consolidation loan is to determine one’s income-to-debt-ratio. Gather all income and expense information. List all monthly expenses such as mortgage, each credit card, utilities, and car payment. Accurately estimate the amount of money spent on gas, running errands and traveling back and forth to work. Accurately estimate the amount of money spent on groceries. The average household consumes approximately $100 worth of groceries per month for each member of the household. This figure may be higher if young children are included, as they have additional expenses such as diapers and formula. Include entertainment expenses such as going out to dinner or renting movies. If the family takes an annual vacation, divide the total amount of money spent on the vacation by twelve to determine its monthly cost. Also, if young children are included, add the monthly childcare expenses, such as day care or a babysitter, to the list. Include any money spent on medical care such as prescriptions. Add annual expenses and divide by twelve to estimate other monthly expenses such as car insurance, taxes, homeowners insurance, and health care costs. Total all monthly expenses to arrive at the monthly debt figure.
Next, list all monthly income. Include items such as child support and spousal support. For salaries, divide the annual income by twelve to arrive at a monthly figure. Include any retirement income, annuities, and dividend income. Total all monthly figures to arrive at the monthly income figure. Subtract the monthly debt figure from the monthly income figure to determine the household’s monthly gain or loss.
Ideally, one’s monthly income should exceed one’s monthly debt. If this is not the case, one should consider a credit card debt consolidation loan.
How to Choose the Right Loan
The next step in choosing the right credit card debt consolidation loan is to determine an accurate value of all household assets. One should contact a reputable, certified appraiser to accurately value the house, cars, jewelry, and other assets. For some individuals, re-balancing the debt-to-income ratio may be as simple as selling the household’s third car. This activity will eliminate one car payment per month and lower the annual car insurance premium. The additional income generated can then be used to pay off some of the credit card debt.
For other individuals, selling big-ticket items may not be an option. In this instance, an individual should closely evaluate the equity in his home. If enough equity exists to cover all of the credit card debt, one should consider a home equity loan to pay off his credit cards. While home equity loan rates generally are not as low as first mortgage rates, they are a good deal lower than credit card rates.
For individuals with limited or no home equity, an outside credit card debt consolidation specialist can assist in obtaining a loan to lower monthly credit card payments. One should contact a reputable lender to discuss the best credit card debt consolidation loan to meet his needs.
